Parcells Company manufactures backpacks. During 2010 Parcells issued bonds at 10% interest and used the cash proceeds to purchase treasury stock. The following financial information is available for Parcells Company for the years 2010 and 2009.
|
2010 |
2009 |
|
|
Sales |
$ 9,000,000 |
$ 9,000,000 |
|
Net income |
2,240,000 |
2,600,000 |
|
Interest expense |
500,000 |
140,000 |
|
Tax expense |
670,000 |
780,000 |
|
Dividends paid |
890,000 |
1,026,000 |
|
Total assets (year end) |
14,500,000 |
16,875,000 |
|
Average total assets |
14,937,500 |
17,647,000 |
|
Total liabilities (year end) |
6,000,000 |
3,000,000 |
|
Aver. total common stockholders’ equity |
9,400,000 |
14,100,000 |
Instructions
(a) Use the information above to calculate the following ratios for both years: (i) return on assets ratio, (ii) return on common stockholders’ equity ratio, (iii) payout ratio,
(iv) debt to total assets ratio, (v) times interest earned ratio.
(b) Referring to your findings in part (a), discuss the changes in the company’s profitability from 2009 to 2010.
(c) Referring to your findings in part (a), discuss the changes in the company’s solvency from 2009 to 2010.
(d) Based on your findings in (b), was the decision to issue debt to purchase common stock a wise one?